Category: Fiduciary

State Fiduciary and Best Interest Developments: Texas, Virginia and Montana

Texas, Virginia and Montana are the latest states to enact legislation or rules setting forth a best interest standard for annuity producers in recommending annuities to their customers.  Each state has designed its rule to follow the NAIC’s model regulation concerning suitability in annuity transactions, which requires producers to act in the consumer’s best interest without placing the producer’s financial interest ahead of the consumer’s.  Virginia’s new rule took effect May 1, 2021, while Texas’s and Montana’s rules will take effect on September 1 and October 1, 2021, respectively.

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Robinhood vs. Massachusetts’ Secretary of the Commonwealth: A Battle for the Ages over Massachusetts’ New Strict Fiduciary Duty Rule

Massachusetts’ Secretary of the Commonwealth, William Galvin, is taking on Robinhood for violating Massachusetts’ new fiduciary duty rule for broker-dealers. In December 2020, Galvin filed a 24-page regulatory complaint, seeking to ban the popular trading app for violating the State’s strict fiduciary duty rule that requires broker-dealers to act in the best interest of their clients. Galvin raised three different violations against Robinhood that allegedly fell short of the new strict fiduciary standard. This new rule, passed in February 2020, was created in response to the Securities and Exchange Commission’s Regulation Best Interest (Reg BI), which Massachusetts believed did not go far enough. Reg BI bars brokers from putting their own financial interest above those of their clients, but fails to define what it means to act “in the customers’ best interest” or mandate that brokers recommend a single best product. While Reg BI requires the disclosure and mitigation of conflicts of interest, Massachusetts felt this requirement was also lacking. Galvin stated that Reg BI is “basically a souped-up version of the suitability standard,” and felt a new State rule was necessary to protect the growing crowd of young investors in the State. During this past year, due to COVID-19 and other meme-based investment activities on the application, Robinhood accumulated over 3 million new users in the first four months of 2020. Galvin’s concerns revolve around the 500,000 customers in Massachusetts, with accounts totaling over $1.6 billion.

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Recent State Fiduciary Duty Developments: Idaho, North Dakota and Ohio

Idaho and North Dakota have adopted wholesale the National Association of Insurance Commissioners’ (NAIC) model suitability standard. Ohio also finalized its proposed rule adopting the NAIC model rule. This brings to six the number of states that have adopted the NAIC model (Arkansas, Delaware, Idaho, Michigan, North Dakota and Ohio), and three others have proposed to do so (Kentucky, Maine, and Nebraska).

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Recent State Fiduciary Duty Developments: Eight States Have Proposed or Finalized Best Interest Standards for Annuity Producers

In recent months, eight states — Arkansas, Delaware, Kentucky, Maine, Michigan, Nebraska, North Dakota, and Ohio — have proposed or finalized rules setting forth a best interest standard for annuity producers in recommending annuities to their customers. Each state has designed its rule to follow the NAIC’s model regulation concerning suitability in annuity transactions, which requires producers to act in the consumer’s best interest without placing the producer’s financial interest ahead of the consumer’s. The rule also requires producers, prior to recommending an annuity, to disclose the scope and terms of their relationship to the consumer, how the producer is being compensated, and any material conflicts of interest. Notably, the rule does not create a fiduciary obligation or relationship with the consumer, and producers are not subject to civil liability for breaching any fiduciary standard of conduct.

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Recent State Fiduciary Duty Developments: Alabama and Rhode Island Issue Regulations

Alabama and Rhode Island are the most recent states to issue regulations setting forth a best interest standard for annuity producers in recommending an annuity to their customers. Both regulations follow the National Association of Insurance Commissioners’ (NAIC’s) model regulation by requiring producers to act in the consumer’s best interest and not place the producer’s financial interest ahead of the consumer’s. Prior to recommending an annuity, producers are required to disclose the scope and terms of their relationship with the consumer, how the producer is being compensated and any material conflicts of interest. Like the NAIC model regulation, the Alabama and Rhode Island regulations do not create a fiduciary obligation or relationship with the consumer and producers are not subject to civil liability for breaching any fiduciary standard of conduct.

The Alabama regulation is still in its proposed form, with comments due December 7, 2020. If finalized without delay, the regulation would take effect on January 1, 2021. The Rhode Island regulation has been finalized and takes effect on April 1, 2021. A copy of the updated state chart can be found here.

Recent State Fiduciary Duty Developments

September 1 marked the deadline for enforcement of the Massachusetts regulation on the fiduciary standard for securities recommendations. The regulation went into effect in March 2020. It is widely anticipated that enforcement steps will begin in the near future and that the Massachusetts Securities Division will be aggressive in seeking compliance with the new requirement.

View a copy of the updated state chart.